Optimism begins to fade over Brazil growth prospects: Reuters poll

BRASILIA (Reuters) - A year-long wave of optimism over Brazil’s long-term economic prospects may be fading as skepticism grows over the fate of structural reforms after this year’s presidential elections, according to the latest Reuters poll of economists.

The Rocinha slum is see behind buildings in Rio de Janeiro, Brazil April 18, 2018. REUTERS/Pilar Olivares

Poll respondents downgraded their forecast for 2019 economic growth for the first time since Reuters began collecting estimates for that year, in January 2017.

Latin America’s largest economy is now expected to expand 2.7 percent in 2019, according to the median of 42 estimates taken April 9-16, compared to 2.8 percent in the previous survey.

Estimates varied between 1.5 percent and 4 percent, a wider range than in the January poll but consistent with previous surveys, suggesting a widespread decline in expectations.

Though the change is small, it breaks a remarkable stretch of upward revisions that suggested a growing conviction that Brazil would manage to sustainably grow at higher rates after emerging from its deepest recession in decades.

That perception seems to be changing after President Michel Temer failed to pass a bill streamlining the social security system that analysts and ratings agencies considered crucial to curbing growth of public debt.

“The longer it takes for policymakers to tackle difficult measures, such as pension reform, the harder it will be for a favorable equilibrium to emerge,” Goldman Sachs economist Alberto Ramos said. “Not only is the speed of recovery at stake, but also where the economy will end up.”

Temer, whose approval rate has plummeted due to corruption scandals and an unpopular austerity platform, faced strong lawmaker opposition to the pension plan and gave up on it after a federal intervention in Rio de Janeiro state legally barred Congress from voting on constitutional amendments.

Now the burden of safeguarding a constitutionally mandated spending ceiling will fall on the winner of this year’s presidential election, which is looking to be the most uncertain in decades.

A recent survey showed growing uncertainty among voters after former President Luiz Inácio Lula da Silva, who was leading polls and had rallied against Temer’s fiscal agenda, was arrested for accepting bribes.

The field is divided between several political outsiders and insiders, from former São Paulo Governor Geraldo Alckmin and former Supreme Court Justice Joaquim Barbosa to law-and-order lawmaker Jair Bolsonaro and nationalist Ciro Gomes.

Whether the winner will favor deficit-cutting measures or gather enough support from Congress to implement them remains to be seen.

“A government with enough political capital to implement the needed fiscal measures can emerge from the presidential elections in October 2018, but the risks are not negligible,” BBVA economists wrote in a report.

The change in outlook is even more remarkable when confronted with the rest of Latin America, where forecasts for 2019 GDP growth for all four other major economies included in the poll remained flat.

In fact, Brazil is likely to underperform nearly all of them, with the sole exception being Mexico, which is expected to grow 2.3 percent after hosting its own presidential elections.

Still, economists upgraded their 2018 growth estimates for Mexico, a sign that dragged-out negotiations with the United States and Canada on trade are unlikely to have much effect on activity in the short-term.